No longer poor man’s gold

If gold is glittering, silver is shining brighter at $40.72 (Rs 1,800) an ounce (28.35 gram). For quite some time now, the poor man’s gold has been outperforming the yellow metal, platinum and palladium on its way to a 31-year high.

That’s because silver has benefited from the spillover demand for gold. As the political unrest continues in the Middle East and boiling oil prices raise the spectre of inflation in an investor’s mind, he is rushing to precious metals as a hedge. Some investors see silver as a cheaper alternative to gold, though that may not be true any longer.

Investment demand rose 40% in 2010 as a result of increases in silver exchange-traded funds and sales of physical bullion bars and coins, according to the World Silver Survey from the Silver Institute.

Unlike gold, silver also has industrial uses. Demand from this source increased 21% in 2010 as well. The institute, an industry grouping that is funded by mining companies, projects that industrial demand will grow at least 8% annually for the next five years. It points to new industrial uses of silver such as electrical contacts and photovoltaic cells as key sources of demand.

But will that alone sustain this run-up in demand? After all, when it comes to industrial uses, there are several alternatives to silver. And it must be borne in mind that the industrial demand has still not recovered to pre-recession levels, as Barclays Capital points out. Also, countries such as India, which now accounts for a significant chunk of industrial demand, are price-sensitive.

Secondly, if the demand for silver is increasing, supply is gaining faster. Mining output will hit its eighth consecutive annual record in 2011, Barclays Capital estimates. The Royal Bank of Scotland Group Plc (RBS) estimates this source of supply to increase 5% a year over the next few years. But more pertinently, scrap supplies increased last year. Even if that falls, Nick Moore and Daniel Major at RBS reckon that silver inventories amount to 31,000 tonnes, or 14 months of fabrication demand.

Hence, a further upswing in prices depends on investment or speculation, call it what you please. But with central banks around the world moving away from ultra-low interest rates and easy money policy, oil and gold prices are all that remain as supports for silver.